- Credit card delinquency rates are at a seven-year high.
- Pay off credit cards monthly to avoid high interest rates.
- Look at the benefits of the card and ensure that you can take advantage of the perks.
Small and midsize businesses need access to credit, but loans don't always cover the gaps. As lenders tighten borrower requirements, many businesses are turning to credit cards to grow their operations and keep things running smoothly.
Dun & Bradstreet's Small Business Health Index found that in 2019 small businesses were surviving at higher rates, but those same businesses were using credit cards almost as frequently as similar-sized companies did before the 2008 recession. That could be a good thing, but card delinquency rates are at a seven-year high, indicating some business owners might be in over their heads.
Dun & Bradstreet's research shows that business loan rates recently hit their highest point in over a decade. According to the Biz2Credit Small Business Lending Index, bank loan approval rates for small businesses dipped 0.2% in February 2019. Alternative lenders saw a smaller dip, as did credit unions. As traditional credit becomes more expensive (and as lenders tighten standards), credit cards make sense as an alternative solution.
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Finding the right balance
Credit cards offer plenty of advantages, but when used without respect, these beneficial tools can quickly turn into burdens.
Just because a business makes its payments does not mean it uses credit cards wisely. Interest rates on cards tend to be extremely high compared to other funding sources, which means companies that fail to pay in full usually pay more than they earn through the card. Businesses that turn to high-interest credit during hard times might dig their own graves by making a bad situation worse.
That said, credit cards provide significant advantages for responsible borrowers. Cash back, interest-free periods and 60-day floats all help growing companies take advantage of short windows of opportunity. To get the most from the perks without suffering the drawbacks, business owners should take the time to learn the ins and outs of business card financing.
Small and midsize business owners should consider the following tips when leveraging credit cards to finance their companies.
Don't pay interest
Credit cards help businesses by offering quick access to capital. Banks make a little money off exchange fees, but they make much more when customers get into a cycle of debt. Business owners should only use credit cards when they can do so without carrying a balance from month to month.
This should be common personal finance wisdom, but many business owners get so involved with the growth of their companies that they fail to recognize bad habits until it's too late. Credit card interest rates fluctuate based on the credit market, unlike traditional loans, which means companies could easily negate future gains by paying higher fees – even if they think they're beating the market. Card owners should maintain constant vigilance to avoid turning a tool into an added expense.
Optimize card spending for benefits
Many business cards include benefits that traditional financing sources don't offer. These perks can include discounts on travel and lodging or preferred pricing for services. Businesses should explore the market to see which cards offer the most relevant benefits for them.
A business owner who travels infrequently but spends a lot on shipping should not get a card geared toward frequent flyers. Different cards offer perks for shipping, advertising, travel and a host of other areas. As competition for business credit heats up, a few card companies have begun to allow businesses to design their own bonus categories. To avoid spending too much time optimizing card spending, business owners should find one or two cards that cover specific needs.
Watch for introductory offers and terms.
Credit cards attract new users with all sorts of promises. Some advertise zero interest, while others entice applicants by offering thousands of points for new signups. All offers come with strings attached, so business owners should read the fine print carefully.
Offers of miles or points, for instance, usually require businesses to meet a spending threshold within a certain timeframe. Some offers require only a small amount of spending, such as $3,000, while others demand $20,000 or more. Low-interest promotions, meanwhile, might end abruptly when the promotional period ends. A business that floats thousands of dollars on a card could find itself facing a substantial bill after one year. Business owners should only pursue promotional offers when they know what they plan to do with the extra points or money during the grace period.
Track your financial statements
You’ll need to watch your financial statements closely. This gives you an idea how your business is doing and helps you monitor your cash flow. Take a look at each week, and note when your revenue or cash flow is higher. Choose a date when you will have increased cash flow to make your credit card payments.
Avoid co-mingling
It can be tempting to make personal purchases on your business card or business purchases on your personal card. This makes it difficult to keep track of your expenses and profits. It can also negatively affect your credit score if you miss a payment.
Credit card hop cautiously (or not at all)
Credit-card hopping is when you go from one card to another to get perks or rewards like cash back or zero interest periods. Cards often have introductory offers, and opening a new card account can allow you to take advantage of these.
However, you will need to thoroughly research the card before you choose it. You should also take careful note of annual fees. Consider whether it's really worth switching cards. If you are switching to get rewards points you aren’t likely to use, or a lower introductory interest rate even though you pay off your cards before they can accrue interest, there's little benefit.
Opening new lines of credit will lower your credit score slightly, so it's not wise to get new cards often. If you are planning to go for a large loan soon, it's best to avoid credit card hopping so your score will be as high as possible.
Rates will continue to fluctuate, but small business owners should never put themselves in a position to worry about credit card interest. Banks offer lucrative promotional deals because some people who take the bait will give back much more in return. Only with careful and deliberate use of credit cards can small business owners avoid the pitfalls and keep their finances in the clear.